Financial Solvency

If you are earning enough to meet your basic survival expenses on your own and don’t owe any money to anyone or any bank, you are financially solvent. Perhaps you are a young earner in your first job or you have just managed to pay off your debts and loans. Either way, you are already better off than a vast majority of the population, kudos! The next step for you is to become financially stable. That means ensuring you have adequate health insurance for you and your dependents, so that you are capable of handling any unexpected medical emergencies. An unfortunate accident, or a pandemic like Covid-19 that can come out of the blue, can make you bankrupt overnight or push you back into debt with huge hospital bills, given the rising cost of healthcare in India. The next step is to secure your family’s financial welfare in the event of your untimely, pre-mature death, by getting a term life insurance. Learn what type of life insurance is best, and what you should avoid.

Then try to increase your savings rate by reducing expenses and aim to save up to 6-12 months of typical expenses in an emergency fund. This is to take care of unexpected large expenses that may crop up suddenly. Even if you have health insurance, you may be required to either contribute to a co-pay, or pay the bills first and then ask for reimbursement. Or you might be faced with a situation such as floods due to heavy rains that require you to replace all the furniture and electronics in your house. Or perhaps you might unexpectedly be given the pink slip! Having up to 1 year of expenses in a fund gives you the confidence that you can survive for a year without a job, giving you enough time to up-skill and find that next job.

Remember: If you follow Savings = Income – Expenses, then you will always be finding new ways to spend money (on that new iPhone or a bigger car, or that party you didn’t really want to go, or that gold jewellery you didn’t really need) and your savings will either be nil or very low. The way to increase savings and investments, is to follow: Expenses = Income – Savings. That is, have a personal monthly budget, based on which you calculate a certain amount that you can comfortably save every month. Ensure that you put this amount aside in a different bank account meant for emergency expenses (i.e., pay yourself first!) as soon as you get your monthly salary or business income, and then spend only from what’s left.

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